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Parliamentary report says Carillion deceived lenders and investors about its debt levels, and was enabled by ‘complacent’ auditors

17 May 2018 - 08:47
Tom Beardsworth and Áine Quinn

A Carillion sign in Manchester, Britain. Picture: REUTERS

London — British MPs have renewed calls for the "big four" audit firms to be broken up, in a report that highlights the role of auditors’ "complacency" in the collapse of Carillion.

A joint report from two parliamentary committees criticised KPMG, Deloitte, EY and PwC, along with banks and other advisers, for poor oversight and "squeezing fee income out of what remained of the company" in its final months.

The report says Carillion deceived lenders and investors about its debt levels, and was enabled by "complacent" auditors who failed to challenge its "aggressive" accounting.

Carillion, which built and managed government projects, "failed to publish the trustworthy information necessary for investors who relied on public statements", the two committees investigating Carillion said in a 107-page report published on Wednesday.

The January bankruptcy left unpaid debts of about £1.6bn, including bank loans and defaulted bonds.

The joint report from the work and pensions committee and the business, energy and industrial strategy committee accused former Carillion executives of mismanagement and renewed calls for the UK’s competition authorities to consider a break-up of the so-called "big four" accountancy firms.

‘Carillion used aggressive accounting policies to present a rosy picture to the markets.’

"We recommend that the government refers the statutory audit market to the Competition and Markets Authority," the committees said in the report.

"The terms of reference of that review should explicitly include consideration of both breaking up the Big Four into more audit firms, and detaching audit arms from those providing other professional services."

EY said "stakeholders" had declined "to support the plan EY helped Carillion to devise" to keep the company afloat, while KPMG said it had conducted its work "appropriately".

"There are clear benefits of being a multidisciplinary firm, but we also recognise the growing challenges that this structure presents," KPMG said.

PwC said it recognised "the report’s aim to understand the lessons from Carillion" and "would welcome more players to boost choice" in the audit profession.

Deloitte said it recognised the concerns raised by the committees about the concentration of the market, but it believed "a scale, multidisciplinary model is absolutely essential" and "audit-only firms would reduce audit quality and be detrimental to investors and the capital markets".

Richard Adam and Zafar Khan, former chief financial officers who were singled out for criticism in the report, did not respond to messages seeking comment.

Richard Howson, CEO until 2017, whom the report labelled "the figurehead for a business that careered progressively out of control under his misguidedly self-assured leadership", has blamed "a few challenging contracts" in the Middle East for Carillion’s failure.

Carillion’s failure has prompted a debate in Britain about how companies are run, and the extent to which the government relies on businesses to provide services.

Carillion, which had contracts covering projects including hospitals and high-speed rail, and which had expanded rapidly over the past decade, collapsed after failing in last-ditch efforts to get support from lenders and the government.

"Carillion used aggressive accounting policies to present a rosy picture to the markets," the committees said in the report.

"Maintaining stated contract margins in the face of evidence that showed they were optimistic, and accounting for revenue for work that not even been agreed, enabled it to maintain apparently healthy revenue flows.

"It used its early payment facility for suppliers as a credit card, but did not account for it as borrowing. The only cash supporting its profits was that banked by denying money to suppliers."

Debt covenants

"Whether or not all this was within the letter of accountancy law, it was intended to deceive lenders and investors," the report said.

The company would have breached its debt covenants sooner had the liabilities been classified properly, it said.

Legislators also said Carillion executives had potentially breached British directors’ duties.

Separately, the UK Financial Reporting Council, a disciplinary body for accountants, said on Wednesday that it expected to review tens of thousands of documents and e-mails relating to its investigation of Carillion and former financial officials.

It is focusing on KPMG’s audit between 2014 and 2017, including contract accounting, pensions and goodwill.